Individual retirement accounts are a tax-advantaged investment vehicle to help wage earners save for retirement. Ideally, account holders will withdraw funds only after age 59 1/2. Under exceptional circumstances, early withdrawals from a traditional IRA may be free of penalties, or even income tax. If your Roth has been open for five years, you can take out contributions without penalty before retirement age, but not earnings. However, if you are younger than 59 1/2 and want to take withdrawals from your IRA you will be subject to a penalty fee and a higher tax rate than if you waited.
1. Gather your income data for the year. Documents may include the Form W-2, Form 1099, check stubs or other forms or statements.
2. Calculate your modified adjusted gross income (MAGI) by working through the first page of IRS Form 1040. Include the amount of the early withdrawal as income. You might also submit the same data to an online tax preparation site to reach the MAGI.
3. Look up your MAGI on the IRS tax table for the year. It is available online and in print.
4. Multiply the amount of the IRA withdrawal by the ordinary income tax rate. For example, if you take out $5,000 and your tax rate is 20 percent, multiply $5,000 by 0.20 to reach $1,000.
5. Multiply the distribution amount by 10 percent, the penalty tax rate. In this case, the calculation would be $5,000 times 0.10 which equals $500.
6. Add together the ordinary income tax and penalty tax figures. In this example, add $1,000 plus $500 to reach $1,500, which is your tax liability on the early IRA withdrawal..
Items you will need
- Income data
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